Caveat Emptor

Monday, December 23, 2013

It has been and interesting and challenging year. After the election I decided to take a break and in that time have not looked at one newscast, have not listened to talk radio and have read only the Wall Street Journal. My academic career officially ended last week with the final paper being accepted for publication by a top 10 journal. What was especially satisfying it was coauthored with my closest friend in academics Bob Schweitzer who lost his battle with bladder cancer. Bob would not have wanted a more fitting tribute to a great career. All in all I have not missed academics and have embraced retirement. At first I was concerned that since I have enjoyed every minute and every aspect of my professional life, I wondered whether it constituted such a vital part of me that I would be somewhat diminished without it. Boy was I wrong. I now had time to devote to all of my other interests and those close to me tell me that I have become somewhat more humanized. Its interesting what a step back from a life full of "let's see how good I am" can be. From the first challenge of having a genius brother (one of the three geniuses I have known) to going to the University of Georgia (where those in the same class at first thought I was only there because the courts had ordered the university to admit blacks the year before) to a phd program where every day was a thrilling excursion and where I no longer felt I was the smartest person in the room to a professional life where I succeeded more than my wildest dreams. All in all I would not trade my life or my vita for anyone else's. As can be discerned from the lack of postings to the blog, I also took a break from blogging. It wasn't that the ideas had stopped it was just that as I decompressed the blog became less and less important to me. So I have decided to officially shut it down as well. I would like to thank all who have honored me by reading it, by making comments and even referring others to it. I cannot thank you enough but it is time to move on to other things. I hope you all have a wonderful holiday season and a happy and prosperous new year.

Monday, November 4, 2013

The following appeared on November 4 in the Knoxville News-Sentinel
In financial markets the interest rate on Treasurys is considered the "risk free" rate where "risk free" refers to risk of default and not interest rate risk. This means that the debt obligations of the US government can - like any other financial instrument - change in value as market conditions change. If demand and supply conditions cause the interest rates of the securities to move, then their prices will move in the opposite direction. This is interest rate risk. However, the securities issued by the US government are said to be free from default risk because the government can always pay its debts. It can issue more debt and use the proceeds to pay current obligations or create money to pay off those obligations. In the case of issuing more debt, why would a rational person or institution buy the bonds of a bankrupt institution teetering on default? The answer is that most would not, especially if the likelihood exists for repayment in inflated dollars. However, the government could buy the bonds it issues and use the proceeds to pay off current obligations. That is the Treasury could sell its bonds to Social Security (the largest holder) or to Medicare (9th largest holder) or to the Federal Reserve (the second largest holder). Interestingly enough, in the budget debate there has been no consideration of banning Treasury sales to other federal entities. Yet without doing so there is no fiscal discipline - other than the debt ceiling - to inhibit the government from continuing to spend out of control. In a macro sense, given the size of the budget and tax inflows, the government needs to borrow an additional 25 percent to make ends meet and this difference will continue to grow as entitlements grow. If there is a shortfall, the Treasury can decide who to pay and who not to pay. It could pay all the principal and interest owed on the debt, social security, medicare and the military and then decide to default on other obligations. This is highly unlikely given our political climate. Indeed, when both the republicans and the democrats announced that the 800,000 federal workers who had be furloughed in the latest "shutdown" would receive all back pay and benefits - in essence a paid vacation - I knew that neither side was really serious about addressing the problem. That was confirmed when we got a budget deal reinstating government spending without a cap until January 15, 2014 and allowing the debt ceiling to rise until February 7. Thus, the proverbial can was kicked down the road for the umpteenth time. Maybe this will give the congress and the administration time to come up with a viable solution to address the root causes of the problem but don't hold your breath since the majority of our elected officials simply do not have the will or the discipline to just say no.

Friday, October 11, 2013

I have written before that the debt ceiling is the only thing that can force fiscal discipline on the federal government. Given that government “revenues” are almost $3 trillion a year, that is more than enough to meet all interest and principal payments on the outstanding federal debt but not enough to cover all government expenditures – hence the continuing and growing deficit. The debt ceiling would force the federal government to prioritize its spending by placing a limit on its ability to continue to borrow. Of course if the debt ceiling is not raised the UA would default but is that necessarily a bad thing. Most people seem to think that a default would mean that the US would default on the interest and principal payments. But that would be a choice made by the Treasury and the president. In reality, there is more than enough to pay on the debt as promised, social security, the military and medicare. What would be missing would be the 25 percent left to pay all government workers and fund all government programs. Thus, the government would default on its obligations to its employees and not to its debt holders. In essence federal workers would be faced with what workers face in the private sector when their employers go out of business. If this is not catastrophic for the private sector then why is this catastrophic for the government? As it now stands, federal workers have been sheltered from facing the consequences stemming from a bloated government making irresponsible decisions. Of course the government will choose to shut down parts of the government that will create the most pain amongst its citizens in order to force the continuation of unlimited largesse. Nonetheless, the day of reckoning is going to come if we continue on the path that we are on. I consider this more irresponsible that the termination of unnecessary spending and growth of the size of the government. I wrote before that the congress should just say "no". I reiterate that plea.

Monday, October 7, 2013

You have probably heard that Ted Cruz and Mike Lee were attacked by some of their republican colleagues in a closed door session over their opposition to Obamacare. The reason you probably heard this is because someone at the meeting leaked the happenings to the press. I give you odds that the leaker was probably Bob Corker. Corker has proven to be no friend of conservatives. He appears to be enamored of his own voice and puts himself before every camera available. I for one am tired of seeing his face in the press and on TV and reading his pious quotes. Since he has been in the senate he has abandoned the principles on which he was elected in favor of “compromise”. He is now the darling of the media and it looks as if he is jockeying to be Obama’s favorite republican senator. Of course there are some here in Tennessee that would argue that Lamar Alexander has that distinction. Once upon a time I wrote that West Virginia had the nation’s worse senators with Jay Rockefeller and KKK Robert Byrd. However, I am beginning to think that Tennessee’s senators are vying for that honor. Kudos to Cruz and Lee for fighting the good fight. By themselves they could not have caused the government “slimdown”. However they are the ones vilified for it. By the way, Have you missed the government? TSA is still at the airports. The off budget agencies are still regulating. The only indicators of the “slimdown” are the shutting down of government websites – how much is the cost of their maintenance – and the silly barricading of government monuments and park closures – obviously intended to just make us mad. So go on with your bad selves Ted Cruz and Mike Lee. I wish you were my senators.

Thursday, September 19, 2013

The usual suspects among the sports columnists are on the warpath again demanding that the Washington Redskins change their name. No matter that the owner Daniel Synder says that it will never happen as long as he owns the team and that polls taken show that the fans overwhelmingly want the name to stay the same. Finally one ESPN columnist Rick Rielly went against the stream of his fellows and published a column saying did anyone ask the Indians? http://espn.go.com/nfl/story/_/id/9689220/redskins-name-change-not-easy-sounds. Since Synder owns the team there is nothing that the NFL can do to force a change. This is unlike the NCAA which in 2005 issued an edict saying that any school using indian logos or nicknames would be banned from postseason play forcing many schools to change their names. Perhaps the biggest stink was the case of the University of North Dakota Fighting Sioux who were forced into submission because primarily of the prominence of their hockey team - although ironically their logo was designed by a Native American. The North Dakota legislature forbade the adoption of a new mascot or logo until 2015 so as of today they are the University of North Dakota ----------. When the NCAA whose hierarchy is made up of middle aged white men decided that the indian symbols were offensive, several schools notably Florida State (Seminoles) went ballistic. Other schools that had large Native American populations that had indian symbols such as University of North Carolina - Pembroke were granted exemptions. But isn't it ironic (Reilly also points this out) that many schools with Native American students called themselves Redskins, Braves and Savages? The last time I looked, the NCAA must have blinked. Some schools changed prior to the ban (Stanford Indians/Cardinal, Marquette Warriors/Golden Eagles, St John Redmen/Red Storm) while others changed because of it Arkansas State Indians/Red Wolves, Louisiana-Monroe Indians/Warhawks , Newberry Indians/Wolves and Carthage College morphed from the Redmen to the Red Men and their women's teams are the Lady Reds. But Catawba is still the indians, Illinois is still the Fighting Illini, Utah is still the Utes, Central Michigan is still the Chippawas, Alcorn is still the Braves and of course Florida State is still the Seminoles. What is interesting is that all the nicknames connote bravery and stature (Chiefs) rather than scorn and derision. Yes the Atlanta Braves once had a tepee in the outfield and a mascot named Chief Nok-a-homa who did a war dance every time a Brave hit a home run. They also had a laughing indian on their sleeves. But all that is gone leaving only the laughing gap-toothed indian logo of the Cleveland Indians - which even I find offensive. Nevertheless, the baseball team that preceded the Braves were a minor league team called the Atlanta Crackers. So why weren't white folks offended? What is hilarious is that the Negro league team was known as the Black Crackers. Isn't it interesting that the same columnists who have stood up for the indians have been silent on the name Rebels? Of course all the confederate symbols have gone now. When I went to the University of Georgia, the band was the Dixie Redcoat Marching band and played Dixie after the National Anthem and most of the crowd waved confederate flags. All the tailgaters flew rebel flags. But it was worse at Ole Miss. I even turned down an interview for a deanship at Ole Miss because of all the rebel nonsense. However, all that stuff is gone. I went to the Georgia/South Carolina game and saw not one rebel flag. Ole Miss' football and basketball teams are mostly black. My feeling is that if they aren't bothered by being called "Rebels" then why should I be offended for them?

Sunday, September 1, 2013

The Associated Press recently had a story on how America has appeared to have lost its love affair with the automobile. The article by Joan Lowry entitled "Less driving as car culture wanes" (http://kdhnews.com/business/less-driving-as-car-culture-wanes/article_ae9e58d6-11b5-11e3-bb5e-001a4bcf6878.html?mode=jqm) notes that the collective miles driven by Americans peaked in 2007 and has declined each year since. Also most notably the percent of teens and young adults with drivers licenses has dropped. What are the reasons why? Lowry mentions the obvious ones: the bad economy, terrible commutes from the suburbs and headaches of car ownership in the cities. Lowry also mentions modern reasons such as shopping online and an uptick in walking and biking to work. Now I doubt whether walking and biking to work have made a serious impact on the statistics. However, she does not give the reasons that are obvious to me. Cars have been neutered and are just no fun anymore. I recently drove 4 hours and did not see a single vehicle that I wanted to own. It used to be different with mainstream America and its Mustangs, GTOs, Corvettes, MGBs, TR3s, and other wonderful cars. Now most what you see are minivans (and pickups here in Tennessee). I was also struck by the volume of wimpy cars that looked like cars with the backend chopped off with lawnmower engines. Isn't it apparent that high gas prices, high insurance rates, fleet milage regulations and the emasculation of the American male have all worked to eliminate the fun from driving? As I wrote in this space back in 2009, that the love affair has been lost is evident from the music (http://haroldblack.blogspot.com/2009/06/im-kickin-in-my-red-prius.html) Gone are the songs rhapsodizing the automobile. Who would profess (other than a nerd) love for the vast majority of today's automobile?

This article appeared in the Knoxville News-Sentinel September 1, 2013
The Kansas City Fed’s annual meeting in Jackson Hole, WY has evolved from inviting me and other pedestrian regulators and economists to being a who’s who concave of Ivy League economists and central bankers. Instead of presenting esoteric academic papers, the conference now features a few papers on a particular theme and then discussions by central bankers on how they are saving the world. This year’s conference was about the legacy of Ben Bernanke although he chose not to attend. As can be imagined that legacy is controversial outside the world of central bankers. It is called unconventional monetary policy. While conventional monetary policy features manipulation of the fed funds rate and monetary aggregates like the money supply and monetary base, unconventional monetary policy revolves around large scale asset purchases. The Bernanke Fed initiated this policy with the establishment of specialized lending facilities early in the recession and lending to nonbanks and foreign banks. Gradually, the Fed wound down the special lending facilities and then concentrated on asset purchases inflating its balance sheet to around $3 trillion by year end 2012. Currently, the Fed is purchasing around $40 billion in mortgage backed securities and $45 billion in Treasurys per month. At Jackson Hole, Christine Lagarde, the managing director of the International Monetary Fund, said that Bernanke and other central bankers had prevented a severe depression through unconventional monetary policy. She said that the policy was a clear success and the world’s central bankers should continue such policy. However Lagarde did not mention that such policy made the recovery from recession the weakest in history. The central bankers also did not dwell on the fact that such a policy has made it difficult to unwind. Indeed, the mere mention of the possibility by Bernanke sent the stock market into a tizzy. However, the fact remains that research indicates that the Fed’s policy has created market distortions, market volatility and asset bubbles that could lead to another serious downturn. In fact a paper at the Federal Reserve Bank of St. Louis concludes that the Fed’s term auction facility which was a program designed to lessen the spread between short term bank borrowing rates and equivalent Treasury rates (risk premium) actually increased the rates because it signaled to the market that the financial crisis was actually worse than the market had thought. At Jackson Hole a paper was presented by Northwestern University’s Arvind Krishnamurthy that the Fed’s purchases of mortgage backed securities had more of an economic impact than did the purchasing of Treasurys. Indeed Krishnamurthy finds that Fed purchases had little economic benefit. Perhaps not ironically, the purchasing of Treasurys did benefit the Administration in that it allowed increased deficit spending as the Fed financed the government’s deficit spending.

About Me

Harold A. Black is professor emeritus in the Department of Finance, University of Tennessee, Knoxville having retired after 24 years of service. He has served on the faculties of American University, Howard University, the University of North Carolina - Chapel Hill and the University of Florida. His government service includes the Office of the Comptroller of the Currency and as a Board Member of the National Credit Union Administration. He also has served on the boards of directors Home Savings of America and its parent company, H. F. Ahmanson & Co., Irwindale, California prior to its merger with Washington Mutual Savings Bank, on the board of New Century Financial Corporation, Irvine, California, then the nation’s largest real estate investment trust and as director and later chairman of the Nashville Branch of the Federal Reserve Bank of Atlanta. He writes an occasional article for the Knoxville News-Sentinel at http://www.knoxnews.com/staff/dr-harold-black/. His web page is haroldablackphd.com